In re Hub Carpet Co., 235.

• Decision Date: 17 April 1922
• Docket Number: 235.
• Citation: 282 F. 12
• Parties: In re HUB CARPET CO.
• Court: U.S. Court of Appeals — Second Circuit

282 F. 12

In re HUB CARPET CO.

No. 235.

United States Court of Appeals, Second Circuit.

April 17, 1922

Selden Bacon, of New York City, for appellant.

Louis S. Posner, of New York City, for appellee Ratner.

Certiorari granted 258 U.S. . . ., 42 Sup.Ct. 591, 66 L.Ed. . . . .

Appeal from an order or decree of the District Court for the Southern District of New York, ordering the receiver of the bankrupt to account to petitioner, Aaron Ratner, for all sums received upon certain accounts, and denying the receiver's motion to pay over to him certain sums theretofore received by Ratner.

Hub Carpet Company was what is sometimes called colloquially a family corporation, with four officers and stockholders. One of these was Abner Ratner, the vice president. His father Aaron Ratner, was not connected in any manner with the corporation, but wished to help his son. On May 23, 1921, the board of directors held a meeting at which the treasurer reported that a representative of the well-known house of W & J. Sloan Company had suggested the advisability of Hub Company obtaining more money with which 'to run the business,' and that through Abner Ratner he, 'the treasurer,' had arranged to borrow a sum not to exceed $30,000 from Aaron Ratner upon the notes of the company secured by present and future accounts receivable. Following this report, a resolution was duly adopted, authorizing the borrowing on notes and the delivery as security of 'an assignment to the said Aaron Ratner of the books of account of the company.'

Under the same date an agreement was entered into between Hub Company and Aaron Ratner, whereby Ratner bound himself to make loans from time to time up to $30,000, these loans to be evidenced by the notes of Hub Company. Further, Hub Company assigned and transferred as collateral security all accounts then and thereafter to become due in the ordinary course of business. Hub Company agreed to keep Ratner fully advised of its financial condition, and authorized him 'to enforce this assignment at any time that in his judgment it may be for his interest to do so, notwithstanding the time for the payment of the notes has not in fact accrued. ' It is not disputed that it was understood that Hub Company should go on collecting its receivables and using the proceeds thereof without accounting to Aaron Ratner, until he so required.

Pursuant to the agreement, Hub Company delivered to Aaron Ratner monthly a list of receivables, showing collections, changes in the accounts, and new receivables, or, in brief, a statement of the situation as it currently stood. The last letter-- i.e., that of September 23, 1921-- transmitting the September list, is typical of the routine between the parties. It read: 'Inclosed find the September list of accounts receivable, assigned to you in accordance with our agreement of May 23, 1921. ' Up to September 17, 1921, Ratner had not asked for any proceeds of the receivables. At that time, however, he became disturbed because of the pressure of creditors, and demanded the protection of his agreement, and it was agreed that he should receive 'checks' that would thereafter come in, in connection with its (the company's) accounts receivable.'

Thereafter Ratner received the checks, trade acceptances, and notes which came in from Hub Company's debtors who were mentioned on the lists. These receivables were turned over to Aaron Ratner 'in precisely the form in which they were received. ' It is this amount which the receiver demands, and it is the difference between $30,000 and this sum of $11,581.78, with interest, which Ratner demands from the receiver; the petition in bankruptcy against Hub Company having been filed September 26, 1921.

Before HOUGH, MANTON, and MAYER, Circuit Judges.

MAYER Circuit Judge (after stating the facts as above).

There is nothing in this record to warrant even a suggestion of fraud. The loan by Ratner and the assignment by Hub Company of the accounts receivable constituted a legitimate and businesslike transaction, whereby a considerate father was willing to help his son and the latter's associates in maintaining what, at the time, seemed to be a hopeful business. The questions involved, therefore, are solely questions of law. We shall speak of the receiver as a trustee in bankruptcy, and as though the application of Ratner had been made after the appointment of a trustee, in view of our recent decision in Matter of Max Mitchell (C.C.A.) 278 F. 707, filed January 18, 1922.

The status and powers of a trustee under section 47a of the Bankruptcy Act, as that section now reads since the amendments of 1910 (Comp. St. Sec. 9631), were decisively dealt with in Bailey v. Baker Ice Machine Co., 239 U.S. 268, 275, 276, 36 Sup.Ct. 50, 60 L.Ed. 275. In that case, Baker Ice Machine Company had made an agreement with Grant Bros. for the conditional sale of a machine, the title remaining in Baker Company until the purchase price was fully paid and the machine being in the possession of Grant Bros. Under the recording law of Kansas (Gen. St. 1915, Sec. 6508), a contract of conditional sale is valid between the parties, whether filed for record or not, but is void as against a creditor of the vendee, who fastens a lien upon the property by execution, attachment, or like legal process before the contract is filed for record. The contract was made October 14, 1911, and filed for record May 15, 1912.

On June 11, 1912, Grant Bros. filed their voluntary petition in bankruptcy, and on the following day were adjudged bankrupts. At that time the chattel which was the subject-matter of the controversy was found in the possession of the bankrupts. Between October 14, 1911, and May 15, 1912, no creditor had 'fastened a lien upon the property by execution, attachment or other legal process. ' It was contended that section 47a, cl. 2, of the Bankruptcy Act, as amended in 1910 (36 Stat. 838, 840, c. 412 (Comp. St. Sec. 9631)), gave a trustee the status of a creditor having such a lien. The court held, however, 'that the trustee takes the status of such a creditor as of the time when the petition in bankruptcy is filed. ' See, also, In re Morris, 204 F. 770, 123 C.C.A. 220; Matter of P. Jesse Matton (C.C.A.) 279 F. 530, decided January 18, 1922.

On September 26, 1921, the date of filing of the bankruptcy petition, in the case at bar, there were no receivables upon which any creditor had 'fastened a lien.' On September 23, 1921, when the September list was delivered to Ratner, pursuant to the agreement of May 23, 1921, that act was equivalent to the taking of possession in the case of a chattel or to the recording of a mortgage under a state statute. There was nothing further nor better which could have been done by the parties to perfect Ratner's lien, or to reduce to possession what the parties had called the 'collateral security.'

There was no way by which Hub Company could physically deliver notes, checks, or other evidences of debt from customers which had not yet been received, and the only practicable method of conferring title and possession was by the delivery of the list in compliance with the demand of September 17, as contemplated by the agreement of May 23. Indeed, on this branch, the case is well within Union Trust Co. v. Bulkley, 150 F. 510, 80 C.C.A. 328; Gregory v. Morris, 96 U.S. 619, 24 L.Ed. 740; McCaffrey v. Woodin, 65 N.Y. 459, 463, 22 Am.Rep. 644. In Wilds v. Board of Education, 227 N.Y. 211, 125 N.E. 89, the court, in distinguishing that case from Titusville Iron Co. v. City of New York, 207 N.Y. 203, 100 N.E. 806, stated that the 'all important difference between the two cases is, however, the time of possession.'

In view, therefore, of the fact that Ratner had title to the accounts receivable and possession thereof, as matter of law prior to the filing of the bankruptcy petition, the sole remaining question is whether the agreement between Ratner and Hub Company was inherently...